City leaders dispute auditor's claim of financial mismanagement

Posted: Thursday, Jan 10th, 2013BY: ERIK CHALHOUB

WATSONVILLE — The city of Watsonville is in poor financial straits, according to an auditor's report released by the Santa Cruz County Grand Jury, and a lack of transparency leaves the majority of the public in the dark.

But two city leaders strongly disagreed with many of the findings in the audit.

The independent audit was conducted by Harvey M. Rose and Associates, a firm that specializes in public sector management consulting.

In the report, the firm focused on Watsonville's General Fund, which it found to be in constant decline over the past five years.

At the end of the fiscal year 2010-11, the city had approximately $1.6 million in General Fund balances, down from $6.6 million during pre-recession 2007-08.

"The smaller this amount is, the less flexibility the city has for meeting increased or unexpected costs," the report stated.

A comparison of seven other cities, including Santa Cruz, Salinas and Gilroy, determined that Watsonville's General Fund balance is "extremely low" compared to the median of $13.8 million, according to the report.

However, in a prepared statement, City Manager Carlos Palacios argued that a wrong choice was made in determining which cities are comparable to Watsonville.

"We disagree strongly with the auditor's characterization of the city's financial strength because the auditor has discounted and ignored contextual background information and made poor choices in comparison cities," he stated.

Additionally, Watsonville is close to the median when compared to "truly comparable cities," according to Palacios.

The report found that, during the last five years, revenues for government activities, which is defined by the Comprehensive Annual Financial Report as all financial transactions and funds except for the city's enterprise activities, declined while expenditures have gone up and down.

In particular, the past two years saw that revenues were less than expenditures, the report stated.

The trend of expenditures outpacing revenues was even more pronounced within the General Fund, according to the report.

The report also claimed that expenditures of most of the General Fund's departments during the past three fiscal years exceeded their approved budgets, which Palacios disputed, stating that the auditor made an error by comparing original budget to final budget amounts and ignored City Council-approved mid-year budget amendments. Also, the General Fund has actually been under budget for the last three years, he stated.

Specifically, the report pointed out that the fire and police departments exceeded their budgets by $1.8 and $1.2 million, respectively, noting that Watsonville has a higher than the median cost for public safety among the comparison cities. The fire department also had extensive overtime costs, the report said.

The report acknowledged that many of the poor financial indicators were related to the national economic downturn of recent years.

However, "a comparison with other California cities that have also been affected by economic conditions shows that the city of Watsonville is worse off in many respects," the report stated, which resulted in the city reducing workforce and services, but still is in a "precarious state" to maintain service levels and cover unexpected costs.

Watsonville lacks sufficient management tools and resources to control expenditures, and in addition, its finance and accounting system is outdated, according to the report.

In his statement, Palacios agreed that the city's financial management computer system needed to be updated and replaced in the near future.

The report suggested that a finance sub-committee be formed, which focuses exclusively on the city's financial condition, with the goal being to prevent a worsening of the situation.

The report argued that "accurate, well-summarized public information (is the) key to effective financial control environment," which the city is lacking in.

"More accurate summarized information needs to be regularly presented to the City Council on the overall financial position of the city to better assess the fiscal impacts of its decisions on expenditures, revenues, loans and transfers," the report stated.

While the city's Comprehensive Annual Financial Reports do have critical financial information, it is not summarized to present key factors that should be of concern to the City Council as well as the public, the report said.

Mayor Lowell Hurst, in a statement, argued that the Council has had "numerous" public hearings and presentations over the past three years regarding budget decisions.

"After three years of intense scrutiny and now an $88,000 study, the Santa Cruz County Grand Jury has come up with the 'earth-shattering' news that we need to update some rules and procedures and that the city is in a challenging budget situation," he stated.

The report will be presented at a future City Council meeting.

The Grand Jury is comprised of 19 local citizen volunteers charged with ensuring that county and city departments and special districts function in the best interests of county residents. The Grand Jury acts as a watchdog over local government agencies, and serves three primary functions: to audit local governmental agencies and officials, to investigate citizen complaints and to publish its investigative findings and recommendations to improve governmental operations.

To view the report, visit www.co.santa-cruz.ca.us/default.aspx?tabid=895 and click on "Performance Audit of the City of Watsonville."